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3. IN PRACTICE, THE PROBLEM IS TO IDENTIFY THE STERLING COUNTERPART OF NON-RESIDENT DEPOSITS. HERE, WE TAKE THE POINT MADE IN YOUR TELEGRAM 406, PARA.1, THAT STERLING ASSETS CANNOT READILY BE IDENTIFIED WITH PARTICULAR DEPOSITS. HOWEVER WE NOTE THAT PARA 6(B) OF YOUR LETTER OF 29 TH JANUARY ASSUMES THAT THIS CAN BE DONE FOR DEPOSITS OF BRANCHES AND CORRESPONDENTS ABROAD. WE WONDER WHY IT SHOULD BE EASIER TO IDENTIFY COUNTERPART FOR THESE DEPOSITS THAN FOR OTHER NON-RESIDENT DEPOSITS.
4. IF, HOWEVER, IT IS NOT POSSIBLE TO IDENTIFY THE STERLING COUNTERPART OF NON-RESIDENT DEPOSITS, IS IT POSSIBLE AT LEAST TO IDENTIFY AND TOTAL THESE DEPOSITS THEMSELVES? (PATERSON'S COMMENTS TO BELL SUGGESTED THAT SOMETHING ON THESE LINES MIGHT BE POSSIBLE). IF SO, WOULD IT NOT BE REASONABLE TO EXCLUDE FROM THE U.K'S GUARANTEE A PROPORTION OF THE BANKS' STERLING ASSETS EQUIVALENT TO THE PROPORTION WHICH NON-RESIDENT LIABILITIES BEARS TO TOTAL LIABILITIES? IF THE ANSWER IS 'YES' THEN ON THIS BASIS WE COULD ESTABLISH BETWEEN US THE EXTENT OF THE U.K'S GUARANTEE LIABILITY ON THE LINES LAID DOWN IN PARAGRAPH 2 ABOVE. WE SEE TWO WAYS IN WHICH THIS COULD BE DONE.
5. FIRST, IF YOU WERE ABLE TO AMEND YOUR ARRANGEMENTS WITH THE COMMERCIAL BANKS SO AS ONLY TO BRING WITHIN OFFICIAL RESERVES STERLING EXCLUDING THE PROPORTION REPRESENTING NON-RESIDENT DEPOSITS, WE COULD CONTINUE TO GUARANTEE ALL STERLING BOUGHT BY THE EXCHANGE FUND, AND WE WOULD BE WILLING TO CONSIDER AN INCREASE IN THE BORROWING LIMIT IF THIS WERE STILL NECESSARY. BUT WE SHOULD NEED TO BE SATISFIED THAT THE ARRANGEMENTS WERE ABSOLUTELY WATERTIGHT.
6. SECONDLY, THE HONG KONG GOVERNMENT WOULD OF COURSE BE AT LIBERTY TO EXTEND ITS OWN GUARANTEE UNDER THE ARRANGEMENTS ALREADY IN FORCE TO FUNDS NOT COVERED BY THE U.K. GUARANTEE, IF YOU ARE PREPARED TO ACCEPT THE EXCHANGE RISK. IF YOU DO NOT WISH TO INCUR SUCH A RISK, YOU COULD REVISE YOUR ARRANGEMENTS WITH THE COMMERCIAL BANKS TO INCLUDE SOME FORM OF RATIONING OF THEIR ABILITY TO ENJOY
/THE GUARANTEE
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